This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

April 4, 2011

Portugal Might Seek Loan, Not Bailout; Bond Auction Bought Time

Contrary to reports over the weekend, a spokesman for Pedro Passos Coelho, leader of Portugal’s opposition Social Democrats, said that Passos Coelho had not indicated support for a bailout. Instead, according to the spokesman, Passos Coelho had said he would support a short-term loan if such a measure became necessary before a June 5 election.

Reuters reported that the spokesman said, "If there is the need for a short-term loan because of a lack of liquidity, we would support it"; on March 26 Passos Coelho had indicated his support for a loan that might be necessary if the nation’s financial situation deteriorated prior to the election. In the wake of the resignation of Prime Minister Jose Socrates after a failed vote on austerity measures, the country has been in the throes of a fiscal crisis, with yield skyrocketing on its bonds and its credit ratings downgraded substantially.

However, a story in the International Financing Review on Saturday indicated that the sale of T-bills late last week may have bought the country sufficient time to avoid the need of a bailout. There was debate over who might have purchased the issue, according to the report. One investor was quoted as saying, "The only reason to buy the most expensive issue on the Portuguese curve is if the sovereign can avoid recourse to external assistance. Although the yield was close to 6% the September 2013 issue could probably have been bought for closer to 8.50%, which suggests there won't have been too many buyers."

There are no securities to be repaid in May, but in June investors must be paid some 6.92 billion euros ($9.841 billion). One banker was quoted as saying, "If Portugal can kick the can down the road, it may be able to pass new measures that will enable it to finance these payments. It should also be remembered that there is a budget deficit that also has to be financed, which ultimately is the root of the problem the sovereign has to address."